Big Pharma, Leadership, and the Startup M&A Outlook
By Monroe Hatch, Senior Director and Pharmaceuticals and Biotech Industry Lead, Integrated Project Management Company, Inc. Will Big Pharma embark on an accelerated buying spree…
“Day One” is a key milestone in a merger or acquisition. The first day of legal ownership, Day One requires thorough planning to gain and exhibit a level of control during a turbulent time for two companies as they begin to come together. So, while the name denotes the start of something, a successful Day One requires a lot of preparation. As with go-live on a new software platform or kickoff of the football season, the first day of an M&A integration is only as good as the groundwork leading up to it.
Depending on the deal, its size and complexity, the M&A experience of the company, and other factors, the level of preparation needed will vary. If the buyer will let the acquired entity operate independently, it may simply need to make an announcement and introductions. On the other extreme, Day One preparation will be much more complicated if there will be immediate or significant changes to the company’s operations or organizational structure. No matter the scale, a successful Day One requires a focused set of actions, executed flawlessly. Here are some considerations for planning this major milestone.
For tips on navigating other key milestones of an M&A integration, read Capture the Full Value from Your M&A Deal →
Give Yourself Plenty of Time to Plan
Though much of the detailed integration planning will occur after the companies have come together legally, you must start planning in advance for the initial set of critical activities to ensure operational control of the acquired business. The amount of time required to plan varies depending on the size and complexity of the business being integrated and the change being introduced. Start planning right after executing the letter of intent so you have enough time. Waiting until you receive regulatory approval will limit the time to plan and may increase the risk of a misstep if there is internal pressure to close the deal quickly.
A company that acquired a line of products and a manufacturing facility learned a hard lesson about unrealistic timelines. First, it provided the integration team just two weeks to plan for Day One prior to the deal closing. Further, the transition services agreement (TSA) negotiated as part of the deal gave only four months to integrate the acquired company onto the buyer’s enterprise resource planning (ERP) platform. TSA development can be a critical part of the success of an integration and should not be overlooked. (For more on effective TSAs, see the sidebar, “What Makes a Good TSA.”) If the acquiring company would have formed the integration team earlier and included them in framing the TSA and planning Day One activities, the timeline would have been more reasonable.
In this instance, the company determined that they had to focus solely on the ERP integration to meet the TSA. This meant that, other than the announcement, no other business-critical Day One issues could be addressed. As a result, the staff at the acquired company was in limbo, waiting for clarity regarding their positions and how to handle differences in key processes. Some key personnel soon left for other jobs because they weren’t confident about their future with the company. More planning prior to Day One would have allowed for better focus on business-critical processes to minimize the disruption to customers, employees, and suppliers. That, in turn, would lead to a smoother integration.
Remember the Rationale
There are major business reasons for your acquisition; don’t lose sight of those key value drivers. For instance, if you purchased the company for its extensive sales network in a different market segment, include the sales department’s leaders when planning Day One activities and involve them in communicating to these new key customers. If you omit the acquired company from participating in key decisions or demand they follow all your procedures, you may lose the very attributes that made them worth acquiring.
The executive team at a consumer products company defined and communicated the key value drivers on Day One to the organization but then failed to adhere to them. Many of the executives had their own agendas and made major decisions that didn’t support the company’s stated intentions. Worse, they didn’t communicate these deviations beyond their immediate team. At meetings meant to advance the functional execution of the integration, integration team members would often ask, “We’re still doing that?” or say, “That’s not what I was told.” This clearly indicated that there was a lack of alignment among the executive team, which trickled down to all levels of the newly combined organization, causing major confusion. IPM worked directly with all levels of leadership to remove these deviations, increase transparency, and provide continuity throughout the integration.
Focus on the Internal Audience First
Many acquiring companies spend a lot of time making sure they’re drafting the right message to communicate the deal to the market, customers, and other stakeholders. An accurate press release is important, but it is essential to inform employees of both companies first. This is key to reducing anxiety and the potential business disruption it can cause. Equally important, it displays respect and caring, setting a good foundation for the combined company’s culture.
Think about how you would want to be treated if the roles were reversed. Would you want to learn that your company had been acquired from a news article? What questions would you have in that situation? It is okay to communicate that you will need time working as a new company before you make some final decisions. What isn’t appropriate is to say nothing. The rumors that will likely emerge will cause much more distraction and diminish confidence in leadership.
IPM recently led the integration for a client that made it a point to empathize with its internal audience. Before the acquisition, company leaders convened their managers to discuss the integration from the acquired company’s point of view. What would they want to know if their company was the one being purchased? What would be their concerns? The acquiring company used the information to help develop their FAQs and other communications. This helped the employees from the acquired company feel valued and welcomed.
Assume You Don’t Know Everything
No matter how thorough your due diligence, there will be many things you don’t know about the company, people, and processes and procedures until you get involved in running the business day to day. For example, it’s difficult to assess a company’s culture from the outside, but it’s an important consideration as culture clashes are at the root of many integration failures. You may be acquiring a competitor, which will naturally keep details about their business close to the vest. In addition, there is often a poor handoff of information and insights gleaned from the due diligence team to the integration team. And even in the best-case scenario, the raw data only paints part of the picture. From 30,000 feet, many things look the same. The devil will be in the details.
A consumer products company IPM worked with assumed that the company it was acquiring was like theirs because both made similar products. So the acquiring company prepared for Day One and the integration without inputs from the acquired company and made critical decisions based on their assumptions about the acquired company’s business model. However, while the two companies made similar products, the market segments they served weren’t the same, which caused rework to processes and business systems and, consequently, delays in integration. IPM helped the organization recognize how the incorrect assumptions led to the delay and implemented controls to help ensure that, moving forward, they made decisions based on facts about the acquired company.
Know Who’s in Charge
Draft a Day One org chart because people will want to know what the combined organization will look like. Make sure everyone understands how they fit in the new organization and who they report to. The leadership team of one company that IPM worked with decided not to make any organizational changes for the first two months after an acquisition. While well-intentioned, the decision made employees of the acquired company anxious because they didn’t know their roles in the new organization or if they’d even continue to have jobs.
However, it is not prudent for the acquiring company to make decisions about deeper levels of the organization before they understand the people and their roles, responsibilities, and capabilities. Plans should ensure sufficient stability to get through the first 30 days, so everyone understands the impact to their roles, but flexible enough that members of both companies will have input into the final org structure. If you make too many organizational changes on Day One, the acquired company will believe you don’t value their input. Don’t set up an “us vs. them” dynamic. Besides easing the transition and building a common culture, you want to tap the best expertise to run the business and capitalize on the combined strengths and capabilities.
Make it Easy to Keep Working
You shouldn’t think or say that it’s “business as usual.” There will be changes, and people will want to know how their work is impacted. Will my boss, office location, daily tasks, or health benefits change? Clarify what changes will occur first and provide a timeline for next steps. A company IPM consulted announced on Day One that no job titles or benefits would change in the first year. While this sounds like “business as usual,” the acquiring company did provide details about immediate changes to some functions as well as upcoming milestones for specific operational integrations. The parent company spent two weeks getting to know the people before they started discussing business processes and role responsibilities. While that’s a generous example, it reassured the team that their input was valuable.
Similarly, make it easy to share. Since the two companies will likely have different IT systems, plan ways to ensure efficient communications and collaboration. A well-organized file-sharing site with company messaging, leadership bios, org charts, FAQs, and folders for uploading documents is essential to ensuring effective communications and promoting the new “one company” model and philosophy.
Contact one of our M&A experts to discuss the execution of your integration.
Day One from a Distance
While company executives prefer to be on site for Day One to instill confidence, get to know employees, and sense the culture and mood, there are times when you can’t be there in person. Through the pandemic’s reduced travel and meeting restrictions, we’ve learned that business practices and communications can continue at a distance. Whether you’re unable to travel or acquiring a company with several locations, these tips will help close the gap.
- Make it a priority to train both companies on the same video-conferencing platform.
- When holding virtual webinars to make announcements, leave plenty of time for Q&A. Encourage questions; seed them if necessary, to show you’re receptive to addressing any topic. Include leaders from HR, finance, operations, and other key departments.
- Formalize informal networking. Host get-to-know-you calls with small groups or an “ask me anything” forum on a messaging platform.
- As COVID restrictions ease and more meetings return to being in person, or in cases when employees are at multiple sites, avoid holding a live townhall with the senior leadership team in one location and remote viewing in other locations. The people outside the in-person meeting can’t interact easily or have a cocktail with their new bosses afterward. Ensuring all the participants have the same remote experience puts everyone on a level playing field. Or distribute senior leaders among the locations, so each site gets some executive face time and attention.
What Makes a Good TSA
A transition services agreement (TSA) is the legal document that specifies how the organization that is selling a business unit or asset will continue to support it for a period of time as it is being integrated into the acquiring company. It is not usually possible to flip a switch and transfer corporate support, enterprise-wide technology, vendor contracts, and other services on Day One. The buyer and seller negotiate the seller’s responsibilities during the transition and for how long. Typically, the acquiring company wants a longer transition to transfer licenses, integrate technology and systems, establish the organizational reporting structure, etc. The seller usually wants a short transition so they can move on with their own priorities.
When preparing a TSA, it’s critical to consider how the transfer will impact every department or function and what it needs continue to operate. Pay attention to how tasks and needs overlap and intersect to ensure elements aren’t being overlooked. And consider vendor contracts and partnership arrangements as well. There may be “survival language” in contracts that impose limitations on the acquiring company or transfer an undesirable liability.
Typical TSA elements for consideration include but are not limited to:
- IT services (ERP hosting, application licenses, network, etc.)
- Facilities, property, and real estate (rent, utilities, migration, etc.)
- Order-to-cash processes (call center, warehousing, field service, etc.)
- R&D and design assurance (product development, ongoing studies, etc.)
- Regulatory (audits, inspections, regulatory intelligence, etc.)
- Quality (documentation transfers, training, change control, etc.)
- Safety (product safety, recalls, inquiries, etc.)
- HR (recruitment, payroll, benefits, etc.)
- Finance and taxes (financial reporting, asset and license transfers, etc.)
- Operations and supply chain (logistics, equipment relocation, vendor transfers, etc.)
In addition, define how the two parties will resolve discrepancies and new issues that arise. As with any legal contract, the more thorough and well-thought-through a TSA is, the more likely it will serve its purpose: to provide a seamless transition of assets, employees, and operations from one owner to another.
M&A success depends on well-timed planning, strategically aligned objectives, and laser-focused execution through the key stages of an integration. Learn how to capture the full value of your merger or acquisition.
Authors:
Neil Domonkos, Principal Consultant, M&A Integration
Zack Fijal, Principal Consultant, M&A Integration
Integrated Project Management Company, Inc.
Services: Mergers & Acquisitions
Industries: Life Sciences | Healthcare | Consumer Products | Industrial Products